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Ethanol Coming to Hampton Roads As Octane Booster in Gasoline

Posted on: Sunday, 16 April 2006, 18:00 CDT

By Jeremiah Mcwilliams, The Virginian-Pilot, Norfolk, Va.

Apr. 16--Ethanol has been sloshing around inside vehicle engines since Henry Ford's Model T hit dusty trails in 1908. Now it's coming to Hampton Roads.

Within weeks, the corn-based alcohol will flow into local gas stations and work its way into cars and trucks . The oil industry, spooked by the environmental hazards of MTBE -- a gasoline additive -- is turning to ethanol as a replacement to boost octane and meet federal clean-air requirements.

Yet, among industry analysts and insiders, questions hang around ethanol like gas fumes around a jerry can.

"Are we going to have enough ethanol?" asked John Felmy, chief economist with the American Petroleum Institute in Washington. "Are you going to seamlessly move it? Will we have it, and will we have it when we need it?"

Few in the oil industry seem certain of the answers, because ethanol is a finicky liquid. It poses logistical challenges for gas station owners by its demand for clean and water-free storage tanks.

Representatives of ethanol refiners and marketers insist they will be able to bring ethanol to market starting in the next two weeks and meet subsequent demand.

By May 1, ethanol is expected to make up 10 percent of each gallon of

gasoline sold to Hampton Roads gas stations by wholesale terminals. Consumers should see the fuel soon after .

M echanics and federal officials insist there will be no effect on a vehicle's engine and only a minimal decrease in how far you can go on a tank of gas, but consumers likely will see an increase in gas prices.

Ethanol has been used since the 1980s in the Midwest as a gasoline additive to boost octane. Today, the Department of Energy estimates that one of every eight gallons of gasoline sold in the United States contains ethanol.

Starting in 1995, the federal government required oil companies to sell reformulated gasoline, or RFG, in high-smog areas, including Hampton Roads and Richmond. RFG contains a mandatory 2.7 percent "oxygenate" ingredient, which gave a major boost to oxygenates such as MTBE and ethanol. Reformulated gas burns cleaner than conventional gasoline and reduces toxic air emissions such as carbon monoxide.

MTBE, or methyl tertiary butyl ether, has been used as a gasoline component for a quarter of a century to boost octane, stop engines from "knocking" and meet federal clean-air standards.

A t room temperature, MTBE is a volatile, flammable liquid. More recently, it has come under increased scrutiny as the compound does not dissolve easily in water and has been linked to cancer. Nationally, water utilities estimate that it could cost $25 billion or more to clean up MTBE from public drinking water.

Twenty-six states, including North Carolina, have banned MTBE in gasoline.

In the Energy Policy Act passed last August, Congress struck down the requirement that gasoline carry an oxygenate such as MTBE and refused to grant the oil industry liability protection from MTBE lawsuits. A gallon of gas still has to hit federal octane benchmarks and clean air standards, though.

So refiners decided to ditch MTBE in favor of ethanol, viewed by the industry as the only viable alternative.

"In terms of oil language, they didn't have a whole lot of time to react to this," said Steve Leisten, branded wholesale division manager at Papco Oil Co. in Virginia Beach, which trucks fuel to about 115 stations in Virginia and North Carolina. "They looked around and said, 'Well, ethanol works, and we can get our hands on it.'"

Ethanol is produced by fermenting sugars derived almost exclusively from the starches contained in corn. Refineries are concentrated in the upper Midwest: Iowa alone accounted for about a fourth of total U.S. production last year.

Virginia has no ethanol refineries, but a plant slated to be the first 100 million-gallon ethanol plant on the East Coast is under construction near Aurora, N.C., about 115 miles south of Norfolk.

Ethanol can be distilled in a process called "wet milling," in which corn kernels are soaked in water before cooking and fermentation. Wet milling produces a variety of potentially profitable by products such as corn gluten, used as feed in poultry farming. However, that's more expensive than dry milling, in which dry corn is mashed into a slaw before fermentation and the only by product is carbon dioxide.

Ethanol has become one of the hottest niches in the fuel industry. U.S. production of ethanol has grown from 175 million gallons in 1980 to 3.9 billion gallons last year, according to the Renewable Fuels Association in Washington. The 97 working U.S. refineries have a capacity of 4.48 billion gallons per year while 33 additional plants are under construction.

"The rate of expansion in this industry has just been phenomenal," said Bob Dinneen, the organization's president and chief executive.

Ethanol will come to petro-

terminals in Hampton Roads by barge, rail or truck and be blended with base gasoline when the two are simultaneously dumped into trucks. It cannot be shipped through pipelines because it bonds with residual water in a process called "phase separation." When ethanol combines with water, it separates from the fuel and lowers the octane of the gasoline.

"It's not an unproven technology, but it's got its own set of problems," said Mike Law, president of Allied Terminals, which runs four liquid storage terminals, including one in Chesapeake.

"The ethanol infrastructure is not in. People are going to be scrambling."

Law said upgrades such as new tanks, meters and loading arms ran his company more than $250,000. Companies with larger tank capacity could spend as much as $1 million on preparations, he said.

Also, with the onset of ethanol, tanker trucks have suddenly become a hot commodity. Because most terminals don't have rail access, trucks will bring in the majority of ethanol, Law said. "That's where the strain is going to be," he predicted.

Bill George, president of Eagle Transport in Rocky Mount, N.C., said that should not be a problem and expects his business to increase by about 10 percent.

"In that market, we'll be OK ," George said of Hampton Roads.

Norfolk Southern Corp. has jumped on the ethanol wagon as well. The Norfolk-based railway has seen its ethanol-transport business soar, with shipments growing 39 percent last year, to 600,000 gallons. Ethanol shipments were up 80 percent in the first three months of 2006 compared with the same period last year, and the company expects to move a billion gallons of ethanol this year, spokeswoman Susan Terpay said.

Dinneen of the Renewable Fuels Association said producers would easily crank out enough ethanol to supply gas stations. The industry has worked around ethanol's aversion to pipelines by creating "a virtual pipeline" with aggressive use of rail and ships, he said.

"I'm not saying there can't be a hiccup every once in a while, but our industry is working closely with refiners to make sure there is enough ethanol," Dinneen said. "We're going to get it where it needs to be."

Paula Chen, a spokeswoman for Exxon Mobil Corp., said the company's stations in South Hampton Roads should be fully converted by the end of the month. "So far, so good," she said.

The federal Energy Information Administration is not as optimistic. The statistical branch of the Department of Energy has warned of problems during the changeover.

"The complexity of the transition away from MTBE. … may give rise to local imbalances between supply and demand and associated price surges during the change," the administration said in a Feb. 22 report. "As the summer progresses and demand grows, the tight supply situation is not likely to ease significantly, leaving the market exposed to increased potential for price volatility" in affected areas.

The recent spike in prices locally and nationally can be attributed, in part, to the changeover. Gasoline is "very tough to get right now," said Leisten of Papco Oil Co. Terminal managers "don't want to bring in too much MTBE product because they won't be able to sell it all."

Storage tanks at terminals have to be nearly emptied before ethanol arrives. Leisten predicted that consumers could see sporadic outages lasting several hours at local gas stations while ethanol supplies are rolled out.

Prices for ethanol and the base gasoline it blends with are moving steadily higher. On Monday, ethanol futures for May 6 delivery hit $2.59 per gallon on the Chicago Board of Trade -- 13 cents higher than two weeks before. Spot prices in New York rose by a dime in one week between March 31 and April 6, about the same as the base gasoline, according to the Oil Price Information Service in Rockville, Md.

Before ethanol blends can be dumped into storage tanks, your neighborhood station requires an exacting spring cleaning.

Jeff Miller, president of Norfolk-based Miller Oil Co., said his company -- which operates 45 stations in Virginia, North Carolina and Florida -- first hired experts to test the sites and determine the level of needed preparations. Just finding out what cleanup would cost carried a bill of about $12,000, he said.

At each gas station using ethanol blends, specialists must use heavy-duty pumps to suck water from the bottom of tanks before the ethanol arrives. As much as 4 inches of water was acceptable with MTBE-blended gasoline, but even an inch of water in the tank could ruin a batch of ethanol-gasoline blend, said Steve Bates, a Chesapeake-based service manager with Southern Pump & Tank Co.

"Water is definitely the enemy of ethanol," Bates said.

Local companies such as Southern Pump & Tank that clean and monitor tanks have seen their business increase .

"The phone doesn't stop ringing," said David Knight, service manager at Jones & Frank, a Norfolk tank-maintenance operation. The company has spent more than $10,000 on new equipment to keep up with ethanol-related business, Knight said.

At a Norfolk Shell station on Hampton Boulevard near Old Dominion University about two weeks ago, Bates and service technician Gary Alexander dropped a hose into a tank and waited for an industrial-strength pump to draw water and gunk from the tank's concave bottom .

"We're doing it every day, from here to Richmond," Bates said, referring to tank pumping. "Everyone's waiting until the last minute. It's a lot of money."

Bates said stations may spend $650 or more per tank to prepare for ethanol's rollout. The Virginia Petroleum, Convenience and Grocery Association in Richmond estimates that cleanup of a four-tank station could cost as much as $3,000.

"Any cost in the system is going to get passed through" to consumers, said John Eichberger, vice president of government relations at the Alexandria-based National Association of Convenience Stores.

Ethanol is expected to drive the pump price of gasoline even higher this spring and summer.

"It's just a real shaky time in the retail gasoline business, both for station owners and consumers," said David Holland, president of Southern Oil Co. in Suffolk, which operates eight Hampton Roads stations. "If I were a guessing man, I would guess that we'll see $3 a gallon gasoline this spring or summer."

The logistical challenges in getting ethanol to the pump have spread jitters across the fuel markets, Miller said, adding that will mean higher prices.

"It's not so much the product, it's the changeover," Miller said. "It creates uncertainty in a market that's already very volatile."

In Hampton Roads, retail gasoline prices surged higher in the past month as the spring driving season arrived. Prices at the pump for regular gasoline rose by about 48 cents to $2.736 per gallon in the month before Friday, and climbed 18 cents in a week. On a nationwide basis, prices averaged $2.741, and some analysts are fretting over the possibility of $3-a-gallon gasoline.

The Energy Information Administration predicted in a Tuesday report that a gallon of regular gas would average $2.62 for the summer -- 25 cents higher than last year -- and named ethanol as a contributing factor.

Ethanol could account for 12 to 18 cents at the pump where MTBE added 6 to 8 cents, said Michael J. O'Connor, president and chief executive of the Virginia Petroleum, Convenience and Grocery Association.

"It's kind of a double-edged sword -- the fact that we're trying to do a safer, cleaner gas adds to the price of that gas," said Georjeane Blumling, vice president of public affairs at Virginia Beach-based AAA Tidewater.

Mechanics and government analysts say ethanol in a 10 percent concentration does not harm engines.

"Ethanol is not really going to hurt the car," said Larry Richway, who owns Auto Works in Newport News. "The mixture they're putting in is not really strong enough to bother the car."

However, a 10 percent ethanol blend will lower fuel efficiency by 1 to 3 percent, according to a report from O'Connor's group. That's almost impossible to notice, said Al Mannato, fuel issues manager with American Petroleum Institute , the oil industry's trade association.

"The percentages you're talking about here are so small that whether or not your tires are inflated could have as big an effect," Mannato said.

Staff writer Scott Harper contributed to this report.

* Reach Jeremiah McWilliams at (757) 446-2344 or jeremiah.mcwilliams@pilotonline.com.

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Copyright (c) 2006, The Virginian-Pilot, Norfolk, Va.

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Source: The Virginian-Pilot

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